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Amending Securitization - International Law Office

International Law Office

Capital Markets - France

Amending Securitization

October 18 1999

Introduction
Umbrella FCCs
Assignment of Receivables

Introduction

The French legislation on securitization was implemented by the act of December 23 1988 (the 'Act'), and substantially amended and completed by the decree of October 6 1997 (the '1997 Decree') and the act dated July 2 1998 (the '1998 Act'). Today, corporate companies, credit institutions, insurance companies and the Caisse des dépôts et consignations (a public entity) are allowed to sell any type of receivables to a vehicle similar to the U.S. grantor trust, the fonds commun de créances or FCC, which will finance itself by issuing units on the market(1).

This legislation has been recently amended by the act of June 25 1999 in order to further facilitate the use of the French securitization.

Umbrella FCCs

It has been observed that the markets generally penalize new issuers or new financial products entering the markets by the imposition of additional margins reflecting the newness factor. In that sense, newly created FCCs, being considered as new issuers entering the market, may be penalized in terms of refinancing costs.

The Act already provided that FCC units could give rise to different rights on the capital and the interests of FCCs. One could argue that these provisions alone allowed the segregation of receivables in different classes, each financed by a specific class of units. However, that position has been challenged by some lawyers and rating agencies.

For that reason, a recent amendment to the act dated June 25 1999 expressly provides that an FCC will be allowed to contain different classes of receivables as long as such classes are provided for in the FCC's by-laws. Each class will then be financed by a specific class of units. In accordance with the FCC's by-laws, any borrowing by the FCC will be attributed to a specific class, and each class will be accounted for separately.

Assignment of Receivables

The Act prevented FCCs from assigning or pledging their receivables in order to meet their financial needs. There are three principal reasons for which an FCC may want to assign its receivables:

  • the seller (or the entity in charge of the collection of the receivables if it is not the seller) may not be able to deal efficiently with the collection of receivables subject to litigation, and, consequently, may want to assign such receivables to an entity better suited for such a collection;

  • the collection of receivables subject to litigation may involve a transaction between the creditor and a guarantor or a partner of the debtor who will repurchase the receivable for a fraction of its price and collect from the debtor directly; and

  • the value-added-tax relating to unrecoverable receivables may only be recovered from the Treasury by the original creditor of such receivables, which is not possible if the FCC is not allowed to reassign the receivables to the seller.

A recent amendment to the act dated June 25, 1999 now provides that an FCC will be allowed to assign any receivable which becomes mature or for which the maturity has been accelerated.


For further information on this topic please contact Gilles Saint Marc or Sara Joli-Coeur at Gide Loyrette Nouel by telephone (+33 1 40 75 29 34) or by fax (+33 1 40 75 69 77 or by e-mail (saintmarc@gide.fr or sara.joli-coeur@gide.fr).
Endnotes

(1) For more details on the principal features of the French securitization market, see French Securitization Law and Practice: Understanding a Maturing and Profitable Market, by Gilles Saint Marc (The Securitization Conduit, Vol. 1, 1998, Issue #1, pp. 22-32), French securitization: New Legislation Eliminates Last Remaining Constraints, by Gilles Saint Marc (The Securitization Conduit, Vol. 1, 1998, Issue #2, pp. 30-31) and French Securitization Facilitated by New Amendments to the Legislation, by Gilles Saint Marc, (The Securitization Conduit, Vol. 2, 1998, Issue #1, pp. 5-7).
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